Will an ageing Hong Kong stop the property bull in its tracks?
Things that make you go hmmm…
As a young investment bank analyst who really should have known better, I met a couple of institutional clients back in mid-1997, and earnestly explained why I felt Hong Kong’s property prices could not possibly fall.
Land constraints, abundant liquidity, low real interest rates, and ample funding all meant, said I, that Hong Kong’s property sector was essentially immune from the chaos then devastating economies across the rest of Asia.
One of these gentlemen fixed me with a gimlet eye and said “hmmm”. The rest, as they say, is history.
Recently I’ve been having the same “hmmm” moment towards the city’s property market, particularly after listening to Chief Executive Carrie Lam Cheng Yuet-ngor’s maiden policy address to the Legislative Council on Wednesday.
Her Starter Homes initiative is admirable, but is only necessary – in my view - because it would seem the government has neither the ability nor the willingness to intervene and check the vertiginous price rise in the property market in any meaningful way.
Put in context, a Home Ownership Scheme with proposed income limits of HK$34,000 for singles and HK$68,000 (US$8,700) for households is essentially meaningless, when set against a market where demand for a recently launched development in Tseung Kwan O was 32 times oversubscribed.
To underscore the point, it’s now commonplace to read updates on the three-way tussle between super luxury developments in Stubbs, Conduit and Mount Nicholson roads as they vie to become Asia’s – if not the world’s – most expensive plots of premium homes.
Unfortunately, calling for a correction in the property market has become a widow maker right across the analyst community. Many have tried; many have failed; and many appear now to have thrown in the towel and would prefer instead – rather like the naive fool above – to focus on reasons why the market is set to rise and rise for the foreseeable future.
Annoyingly, Hong Kong’s property market – which has been trending higher for 14 long years - appears not to be following the rules. Previously, a potent trifecta of supply shock, policy intervention, and positive real interest rates could usually be relied upon to snap – if not decelerate - a rising trend. If such a combination of policy tools were to coincide with an economic crisis, the proverbial property bull would be stopped dead in its tracks.
Perplexingly, few of these inhibitors appear to be working effectively right now. For example, over the past five years, policy intervention has worked wonders in Singapore, but made hardly a dent in Hong Kong. The housing supply target of 85,000 units which so roiled the market in 1997 clearly has lost its power to shock; in 2017–2027, government housing supply is expected to increase by a massive 460,000 units and the market has barely paused for breath.
And while high real interest rates would be certainly effective, a global backdrop of accommodative central banks and excess liquidity suggest rates are not going to rise meaningfully any time soon. Admittedly, the Lehman Crisis of 2007, which brought the global banking system to its knees and threw the global economy into recession, did cause Hong Kong’s property market to correct; but only by around 20 per cent or so. Within 10 months, all losses had been fully recovered and prices were again marching inexorably higher.
But unless you are Cher or Lionel Richie, perhaps there’s one thing Hong Kong’s property market cannot escape; old age. Or more accurately, an ageing population.
Hong Kong has one the most rapidly ageing demographics in the world; worse than South Korea, Singapore, Thailand, and even worse than Japan.
Why does this matter? Because a rapidly ageing working population, by definition, reduces the available pool of borrowers required to purchase properties. And - as a general rule - when there are fewer buyers than sellers - the price usually goes down.
Chart 1 shows Hong Kong mortgage borrowings by age group. What jumps out of the pie is that those aged 30-39 account for fully 63 per cent of total mortgages originated in 2015. Given most mortgages take around 25 years to be repaid, naturally, bankers would describe this demographic as their “target market”.
But according to United Nations forecasts, this 30-39 segment is also expected to contract at the fastest pace in the city, from 16 per cent of the total population in 2015 to a paltry 9 per cent in 2035; a slightly scary rate of decline of 22 per cent per decade for two decades.
What’s worse – as the second chart of Hong Kong population pyramid as of 2015 makes clear – there are slim pickings thereafter, with the 20-29 and 10-19 segments – Hong Kong’s future generation of borrowers – falling off the proverbial demographic cliff.
Demographic trends don’t change quickly and, as the Japanese have found, if you don’t have a natural community of emerging buyers, house prices can and usually do fall.
Of course, immigration can change a population’s demographic profile, but as German Chancellor Angela Merkel found out, it comes at a political cost.
Perhaps Hong Kong could throw open its borders to more young families in a bid to restore the demographic imbalance and further sustain demand for property. But what of the social impact?
John Woods is the chief investment officer of Asia -Pacific at Credit Suisse